TCO helps strategic procurement look beyond purchase price by revealing hidden lifecycle costs, risks and long-term value. For packaging decisions, it supports smarter supplier choices, sustainable solutions and lower total costs over time.
Summary of this article
Strategic procurement goes beyond simply choosing the lowest price. It is about making smart decisions that benefit your organisation in the long term. Total Cost of Ownership (TCO) plays a key role in this by helping you understand the true costs of a purchase.
By applying a TCO analysis, you gain insight into all the costs associated with a product or service throughout its entire lifecycle. This helps you make better choices and ultimately save money.
Total Cost of Ownership (TCO) is an approach that calculates all costs associated with purchasing, using and maintaining a product or service throughout its entire lifespan. It goes beyond just the purchase price and includes operational costs, maintenance costs and end-of-life costs.
In strategic procurement, you use TCO to compare the true value of different suppliers and products. This means you look not only at what you pay today, but also at what it will cost you in the coming years. Consider training costs for your team, maintenance contracts, energy consumption and even the costs of downtime or replacement.
A TCO analysis helps you identify hidden costs that often only come to light later. For example, a cheap machine may require much more maintenance, meaning the total costs ultimately end up being higher than with a more expensive but more reliable option.
At Faes, we see Total Cost of Ownership as more than a procurement calculation. In industrial packaging, the purchase price of a case, crate or custom packaging solution is only one part of the equation. The real costs often appear elsewhere in the chain: in product damage, inefficient handling, unnecessary transport volume, storage, maintenance, return flows or downtime when critical components do not arrive safely or on time.
That is why we approach packaging as part of a wider operational process. A packaging solution should not only protect a product, but also support the way it is handled, transported, stored, reused and serviced throughout its lifecycle. This requires looking beyond materials and dimensions, and taking the full product journey into account.
In practice, a cheaper standard solution can become more expensive over time if it leads to extra handling, more replacements, higher damage rates or less efficient logistics. A well-engineered packaging solution may require a higher initial investment, but can reduce long-term costs by improving protection, enabling reuse, reducing waste and creating a more reliable supply chain.
For Faes, TCO is therefore closely connected to engineering, packaging management and lifecycle thinking. We help customers make packaging decisions based on long-term value rather than short-term unit cost, especially in sectors where products are valuable, fragile, mission-critical or frequently transported. In those environments, packaging is not a commodity, but a strategic tool for protecting value and controlling risk.
A TCO analysis shifts your focus from short-term savings to long-term value by making all cost components visible. This leads to better-informed decisions that reduce total operating costs, rather than just the purchase price.
Traditionally, procurement often focused on finding the lowest price. With a TCO analysis, you take a much broader view. You evaluate suppliers based on their overall impact on your business operations. This may mean choosing a more expensive supplier because they offer better service, cause less downtime or have lower operational costs.
This approach also changes how you negotiate with suppliers. Instead of just talking about price, you also discuss service levels, warranty terms and support. You can develop partnerships based on mutual benefit and long-term value.
A complete TCO calculation includes acquisition costs, operational costs, maintenance costs, training costs, compliance costs and end-of-life costs, such as disposal or recycling. These categories cover the entire lifecycle of a product or service.
The purchase costs are the most obvious: the price you pay for the product or service itself. But it doesn’t stop there. Operational costs include things such as energy consumption, consumables and the time your staff spend using the product.
Maintenance costs can range from scheduled servicing to unexpected repairs. Training costs arise when your team needs to learn how to work with new systems or processes. Compliance costs relate to adhering to regulations and standards.
Don’t forget the end-of-life costs either. How will you dispose of the product at the end of its lifespan? Are there recycling costs, or can you still extract value from it? These costs can be significant, especially for complex technical products.
Implementing TCO in supplier evaluation begins with defining relevant cost categories and collecting data from potential suppliers. You then build an evaluation model that calculates and compares all costs over the expected lifespan.
Start by identifying all cost factors relevant to your specific situation. This varies by sector and type of purchase. For packaging solutions, for example, consider material costs, transport costs, storage costs and the costs of goods damaged due to inadequate packaging.
Next, collect concrete data from suppliers. Ask not only for prices, but also for service levels, warranty terms, support and performance metrics. Use this information to build realistic scenarios for different suppliers.
Create an evaluation matrix in which you can compare all cost factors. Use time value of money principles to discount future costs to their present value. This gives you a fair comparison between different options.
The difference between TCO and lowest price procurement lies in the time horizon and the scope of the analysis. Lowest price procurement focuses solely on the purchase price, whilst TCO takes all costs throughout the entire lifecycle into account in the decision.
With lowest price procurement, you make decisions based on what you pay today. This can lead to purchases that appear cost-effective but turn out to be more expensive in the long run. For example, a cheap packaging solution may result in more damage during transport, which ultimately costs far more than the savings on the packaging itself.
TCO, on the other hand, looks at the total impact of your purchase. You factor risks into your calculation, such as the likelihood of failure, the cost of replacement and the impact on your business operations. This leads to more stable and predictable costs over time.
The result is often that you choose quality over price, because high-quality products and services generally have lower total costs due to their reliability and efficiency.
TCO supports sustainable procurement by making the long-term costs of environmental impact visible and making the principles of the circular economy financially attractive. Sustainable solutions often have lower operational costs and a longer lifespan.
When you apply TCO, the benefits of sustainable choices become clearly visible in your calculations. A reusable packaging solution may have higher upfront costs, but the lower operational costs and longer lifespan make it financially attractive. You save on material costs, waste disposal and transport.
TCO also helps you see the true costs of disposable products. When you factor in all the costs of single-use packaging, including waste disposal, environmental impact and regulatory costs, circular alternatives often become the better choice.
By incorporating sustainability into your TCO calculations, you make environmentally friendly choices that are also financially beneficial. This builds support within your organisation and turns sustainable procurement into a strategic advantage rather than a cost centre.
At Faes, we understand the importance of TCO in strategic procurement. Our packaging management services help you optimise the total cost of your packaging solutions by applying circular principles and extending the lifecycle of your packaging.
A thorough TCO analysis usually takes 4-8 weeks depending on the complexity of the purchase and data availability. Simple products may require only 2-3 weeks, while complex systems or services can take up to 3 months. The key is to balance thoroughness with decision-making speed - start with the most impactful cost categories and refine your analysis over time.
The biggest mistakes include underestimating hidden costs like training and integration, failing to account for risk factors such as supplier reliability, and using unrealistic timeframes for cost projections. Many organizations also make the error of applying the same TCO model across different product categories without customization, leading to inaccurate comparisons.
Build risk scenarios into your TCO model by assigning probability percentages to different outcomes and calculating weighted averages. Include contingency buffers for unexpected costs (typically 10-20% depending on the product category) and use sensitivity analysis to test how changes in key variables affect your results. This helps you make more robust decisions even with incomplete information.
Absolutely. For services, focus on costs like onboarding, training, performance penalties, contract management overhead, and transition costs when switching providers. Include soft costs such as the time your team spends managing the relationship and potential business disruption. Service TCO often reveals that premium providers deliver better value through reduced management burden and higher reliability.
Present TCO results using concrete examples and case studies that demonstrate real savings achieved through the approach. Show the financial impact of past decisions where low initial prices led to higher total costs. Create simple visualizations that clearly illustrate cost differences over time, and start with pilot projects to prove the concept before rolling out organization-wide.
Excel remains the most common tool for basic TCO modeling, but specialized procurement software like SAP Ariba, Oracle Procurement Cloud, or dedicated TCO tools like Gartner's TCO methodology can automate calculations and scenario modeling. For complex analyses, consider building custom models in tools like Python or R that can handle large datasets and advanced risk modeling.
Review your TCO models annually or whenever significant market conditions change, such as new regulations, technology shifts, or supplier landscape changes. For ongoing contracts, conduct quarterly reviews of actual costs versus projected costs to improve model accuracy. Major procurement decisions should trigger a fresh TCO analysis to ensure you're working with current data and assumptions.
Thijs Canjels is Business Innovation Manager at Faes and specializes in packaging management and supply chain optimization. In his blogs, he shares insights on efficiency improvements, cost savings and the strategic role of packaging in modern supply chains.
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